Investors have learned one thing about politics over the past year: Don’t take anything for granted.
Nowhere is that more apparent right now than in the French presidential race where a recent surge in support for socialist and euroskeptic candidate Jean-Luc Melenchon has added a layer of uncertainty to the country’s election. That is bringing “Frexit” fears back to the fore, rattling financial markets this week.
The spread between French and German 10-year government bonds has jumped to a seven-week high at 75 basis points, indicating investors are becoming more nervous about the election outcome, according to analysts. That is also weighing on the euro
, which on Tuesday traded around a one-month low at $1.0579.
France’s CAC 40 index
rose 0.1% on Tuesday, but was still down 0.4% for the week so far.
“The rise of Melenchon reminds us that euroskepticism is a more widespread phenomenon across much of Europe than many believe, and that a runoff of Melenchon and the Front National’s [Marine] Le Pen would certainly give financial markets palpitations,” said analysts at BNP Paribas Investments Partners, in a note on Tuesday.
Both Le Pen and Melenchon want a shake-up of the European Union and to put France’s EU membership to a vote. A so-called Frexit could spark more turmoil than the U.K.’s Brexit vote in June, as France is seen as an integral part of the both the eurozone and the EU.
Up until a few weeks ago, investors had largely put Frexit fears aside as it looked like far-right candidate Le Pen and centrist Emmanuel Macron would get the most votes in the election on April 23. That would leave those two in the second voting round, which analysts have predicted Macron will win by a comfortable margin.
But after a late campaign push from Melenchon and his strong performances in two televised debates, the outsider is now gaining on the other candidates. From a distant fifth in the polls a few weeks ago, support for the far-left candidate is now at almost 20% support. That is neck-and-neck with conservative François Fillon and catching up on Le Pen and Macron.
Deutsche Bank analysts noted that in the 2012 election, Melenchon saw a similar surge in support in polls with only a few weeks until the vote, but he still didn’t end up performing that well in the actual election. They highlighted, however, that “this time may be different because Melenchon appears closer to the top two candidates in first-round polls.”
Polling outfits and forecasters have been criticized over the past year for largely failing to predict Donald Trump’s U.S. presidential election victory and the U.K.’s Brexit vote.
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“While the most likely outcome remains a second round between Macron and Le Pen, the race to qualify for the second round has tightened in the last week, so it’s one to keep an eye on over the next couple of weeks,” said Deutsche Bank strategist Jim Reid in a Tuesday note.